Commentary by Tom Columbia
What Is The Right Price?
“The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business.”– Warren Buffett.
For readers unaware of what my workday routine consisted, 20% of my time was busy providing sharpening service, leaving eighty percent of my hours available to sell and talk about scissors. Clearly, the priority is focused on buyers that agree with this ideology. I looked beyond the skeptics comparing competitors’ methods to my own, knowing that it's not mandatory to win over every cynical buyer, instead seek out the ones that express an interest, the pessimists inevitably would tune an ear to listen. The objective is to provide services to the stylist that buy scissors and then subsequently introduce a routine to sharpen every scissor they bought in the past.
It’s so much easier to have a good relationship with individuals that share similar principles, find them and your business will thrive. Stylists with these qualities become recognizable while chatting about Basic Career Disciplines and its influence on scissors and every haircutting technique. These buyers will happily introduce you to co-workers that hold these same virtues, and this is what solidifies a loyal customer base. Each buyer absorbs information in their own way, allow their thought process to develop. Not everyone becomes a customer on the initial encounter, nor should that be an expectation, and that’s okay. Where you decide to dedicate your time will give you the equivalent outcome.
Salespeople with the ability to uphold their products value when identifying and exploring the customers’ needs are exhibiting proficient listening skills that openly engage stylist. Merging this with buyers having the belief that a product can satisfy their expectations anticipate an equivalent price rivaling that hope. Restrain from discussing prices while the buyer is exploring their needs, when an applicable scissor is chosen revealing the price at this stage reinforces the rationality of their selection. When the scissor happens be on sale and it also matches up to their needs that is a windfall, however, the price was not the most important motivator. This is a vastly different approach than the reliance of monthly promotions which attract customers whose only allegiance is to the price. Always remember that putting price as the emphasis of a sales’ presentation distracts the buying process away from essential features and benefits which are the basis of a products value.
What is the right price? It is the predetermined amount to be paid for the product that is offered to every buyer, not randomly discounted based on the intensity of the demand to lower that price. Pointless price cuts stem from disregarding the cost of doing business, ignoring salesmanship, and demonstrating a reputation for erratic pricing policies. Today there are additional tensions, profitability is facing external stresses from an economic disruption, and it's already an additional challenge.
Inflation is like the slow deflating vehicle tire, the driver oblivious, yet the steering felt different, and you ignored it as you drove past the last exit, now you are late in reacting. Similarly, the arduous dribbles to the cost of doing business that is forewarned by every indicator is upon us. Though it will halfheartedly be accepted, pricing increases are needed to maintain profitability. Delve into your genuine cost increases and make reasonable adjustments that produce a satisfactory outcome, then abide by it.
Analysis is already accessible in your bookkeeping program and merchant processing system; they can provide the precise data to reveal strength or weakness. It takes a few moments to run a report and confirm the cost of creating a sale, examine revenue streams, and a list of customers on the basis of profitability. When revenues dribble away by only a couple of dollars at a time it quickly multiplies into real money. Apologies for a price increase are not needed, making excuses for a business decision conveys the belief that the choice was unwarranted. Look past the pleas from self-appointed negotiators demanding special concessions whatever the stated price. The right price is impartial, and it is relevant.
Be mindful of minor cost that have the appearance of being an absorbable expenditure. Here is an example of incorporating an expense in the retail price. With every scissor sale I would provide a printed booklet, “What You Need To Know About Scissors” (cost $2) along with a sizable oil pen (cost $1.50) and a plush chamois (cost $1.50). This expense accumulated into a whopping $5000 for each one thousand scissors sold. That $5 became real money. These items were essential for maintaining the scissors, and were also branded with our logo, yet critical to the customer. By adding that $5 to the retail price of the scissors it covered that expense and was universally accepted as a valuable benefit. Things that have the impression of being free have value and are never without cost. The oil pen and chamois became popular retail items at $5 each, and the booklet was an excellent reference to encourage daily scissors care. An added side note: A captivating conversation starter in the course of follow-up visits (courtesy calls) was asking to use the stylist oil and chamois when checking their scissors. In poker, this would be called a tell, the expression on their faces was priceless. Daily scissors care is part of a specific routine, reaching for the cleaning kit should be instinctual, not a lengthy search. It’s accolades to the stylist with an oily chamois at hands reach and a mild reminder to the inattentive stylists of the daily obligations that come with scissor ownership.
Believing a comfortable price makes selling simpler is a fallacy, it's never quite low enough and still requires defending. A low price does however deliberately attract unprofitable customers that don't care if they stagnate your economic growth. The reality is that low value buyers are more confident at persuading you that your services and product have less value. Continuing to absorb the increases in the cost of doing business depletes your cash flow and flattens your bank account. There is no disputing the facts, inflation impacts all of us, deal with it as a business decision. This is not a short-term concern; decisions today are going to have an impact on future earnings. Your accountant can offer objective financial advice to sort out the numerical facts. Consider recapturing the increases in the expenses that impact every transaction with a surcharge, or a price increase that has a discernable intent.
We can all agree that the cost of showing up is not free. Begin by assessing your vehicle expenses, then consider at the very least a minimum surcharge. Adding a supplementary charge can absorb that expense in its entirety plus leave excess monies for equipment upgrades. This fee can be obscured in the price or be fully exposed. For decades there have been adjunct fees for home fuel deliveries, furniture/appliance deliveries and service calls, electric/water meter reading, and more recently fees for Covid 19 compliance. Customers pay for the product/service plus the surcharge, this is a widespread practice.
With a surcharge I collected the budgeted $6000 for fuel and basic maintenance for my Nissan NV per year, tracking this expense is simple. These costs are incorporated in every service or scissors sale whether they are openly acknowledged or ignored. Calculate the genuine cost of driving to appointments for a minimum of two hundred working days per year. You already compile this data for your federal taxes. The IRS allows fifty-eight cents per business mile, up 2.5 cents from 2021. There is also the option to deduct the actual vehicle expenses if you institute it in the tax year the vehicle is purchased. Unfortunately, tax deductions are nominal to the real vehicle cost which is estimated to be $1.00 to $1.50 per mile. There is helpful info on the AAA website https://exchange.aaa.com/automotive/aaas-your-driving-costs/ and the official IRS website https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2022.
Deductions lower your tax obligation at years end; however, is this the equivalent of covering the vehicle costs as they occur throughout the year? Absolutely not. Relieve this burden with a surcharge that creates an income stream. Seven dollars (15%) of the $40 that stylist paid for a sharpening was appropriated specifically to my vehicle expense account, it was a surcharge. Dedicating only fifteen percent of the payment acquired from sharpening as few as five scissors daily for two hundred working days accumulated $6000 to cover those cost (5 x 200 x $40 =$40k x15% = $6k). Additional sharpening’s increased that account exponentially. I reiterate that my business model comprised of 20% service sales and 80% retail sales. Adhering to my practice of servicing what I sold and focusing on the stylist that bought scissors allowed the time required to sell hundreds of thousands of dollars’ worth of scissors each year.
Utilize a surcharge to cover a specific expense, then stipulate this amount for that purpose. Familiarity with the numerous costs of providing each service or product and making it discernable from the profit reveals whether you are actually charging the right price. High gross sales income is not a guarantee of profitability. All dealers have well-defined cost of doing business and they are virtually indistinguishable wherever they are located. Profitability is in the specifics of each transaction.